Feb 03, 2017 01:14 PM

What’s Behind China’s Disruptive Foray into E-Cars?

Jia Yueting (left), founder and CEO of LeEco, shakes hands with Nick Sampson, Faraday Future's senior vice president of product R&D and engineering, in front of a Faraday Future FF91 electric car at its unveiling at the CES 2017 electronics trade show in Las Vegas, Nevada, on Jan. 3. Photo: CFP
Jia Yueting (left), founder and CEO of LeEco, shakes hands with Nick Sampson, Faraday Future's senior vice president of product R&D and engineering, in front of a Faraday Future FF91 electric car at its unveiling at the CES 2017 electronics trade show in Las Vegas, Nevada, on Jan. 3. Photo: CFP

For more than a century, the auto industry’s 100-year-old attachment to the internal combustion engine stood as a formidable barrier to new market players.

Then the modern battery and a new generation of electric cars came along, shaking up the industry and leveling the playing field in ways that made it much easier for new companies to join the game.

Not only are the latest battery-powered autos emissions-free, but they’re also free of fuel tanks, tailpipes and other traditional vehicle components that complicate the manufacturing process.

Benefiting from this freedom and the new industry environment are auto industry newcomers in China, including home-appliance manufacturers, internet technology giants and electronics companies. These companies are now expanding into the electric-car business, seizing what they consider a golden opportunity to leapfrog the traditional automaker establishment.

China’s new auto industry players have had to confront tough questions. Some had to decide between partnering with traditional automakers and focusing on complementary services such as auto-computer software, or taking the far-riskier but potentially more-lucrative road less traveled by building cars on their own.

Electronics maker and video-streaming service provider LeEco, for example, decided to design and build its own electric cars from scratch, while e-commerce giant Alibaba Group Holding Ltd. chose to partner with traditional automakers.

LeEco’s capital-intensive business recently stumbled due to liquidity woes, raising questions about whether nontraditional automakers have what it takes to disrupt the industry. But they’re not giving up easily.

Investment Boom

The dominant attitude among China’s electric auto industry players, whether they’re partnering with others or going alone, is “go big or go home.” To that end, many since last year have been racing at full speed toward major business goals by, for example, launching factory construction projects and shelling out huge amounts of money.

LeEco announced in August its plans to build a 20 billion yuan ($2.9 billion) factory in Zhejiang province that is slated to have an annual production capacity of 400,000 electric cars. That same day, the startup Car and Home unveiled plans for a 5 billion yuan plant in Jiangsu province that will be able to build as many as 300,000 cars annually.

A few days later, a Beijing-based startup called Weltmeister said it will build car factories with an initial investment of $1 billion.

Last fall, a joint electric car project was announced by social media giant Tencent Holdings Ltd., Apple contractor Foxconn and Harmony Auto. The partners plan to invest 13.3 billion yuan in a Jiangxi province factory with an annual capacity of 300,000 vehicles. Sources later told Caixin that Foxconn may drop out due to shareholder disputes.

Another industry newcomer is smartphone maker ZTE Corp., which recently said it plans to build a 14.6 billion yuan factory in Zhuhai, Guangdong province, to produce buses and cars. The company recently bought bus maker Guangtong Bus as part of its foray.

Driving the sudden boom is a fear among newcomers that a window of auto industry opportunity may close quickly.

Startup companies now feel they have a chance to beat or at least compete against traditional automakers in the electric-vehicle business because they can focus all of their resources on new technologies.

Established players such as Volkswagen and General Motors Co. are also stepping up electric offerings but remain strongly bound to traditional automaking, said Bill Peng, an auto industry analyst at Strategy&, a division of the consulting firm PricewaterhouseCoopers (PwC). Meanwhile, the U.S. electric car maker Tesla Motors is already a household brand in some parts of the world.

“Newcomers probably have no more than three years to establish their position in the market,” according to Peng. “Once traditional car makers are producing electric cars at scale, startups that have not established a dominant position will be in great danger.”

New companies are also vying for government backing.

The Chinese government has been subsidizing so-called new-energy vehicles, including electric cars, since 2013. Last year, though, only eight traditional automakers received government approval to produce electric passenger cars. And subsidy qualifications have gotten more stringent as part of a government effort to discourage overcapacity and shoddy production.

Sources close to the National Development and Reform Commission, which issues auto production licenses, told Caixin in January that to date, not a single internet-related company had applied for an electric-car factory license.

Connectivity Counts

In Peng’s opinion, one of the industry’s most competitive areas within the next decade will be “connectivity,” or how well cars are integrated into the internet of things.

A recent PwC report said competing auto industry players have been busy developing electronic systems and devices that improve driver control and safety. These so-called advanced driver assistance systems have been a business focus since 2015 and will likely continue to develop through 2025, the report said.

In this area, traditional automakers still have a leg up on electric-car-only manufacturers, thanks to years of accumulated consumer and vehicle data. But newcomers with internet and electronics industry experience are considered better equipped to put databases to practical use.

Alibaba thus brought key strengths to its 50-50 joint venture recently formed with traditional automaker SAIC Motor called Zebra Network Technology. The venture, which makes intelligent-vehicle systems, likewise relies on SAIC’s historical database.

Zebra's technology debuted last year in a gasoline-powered SUV, the Roewe RX5.

Other traditional automakers responded to the Alibaba-SAIC tie-up by unveiling intelligent system investments of their own.

In January, for example, Ford Motor Co. and Toyota Motor Corp. announced an open-source software platform called Smart Device Link, which is seen as a way for big automakers to continue to control auto software development. Also involved in the initiative are Mazda Motor Corp., Groupe PSA, Fuji Heavy Industries Ltd. and Suzuki Motor Corp.

German car makers are also working to keep newcomers at bay. In August 2015, an effort to develop unmanned vehicle technology apparently motivated the 2.8 billion euro ($3 million) acquisition of Here, Nokia's digital map business, by BMW, Audi and Daimler.

Focus on Strengths

LeEco’s first electric-car prototype, called LeSee, includes a backseat entertainment system that incorporates elements from the company’s traditional electronics business.

ZTE, meanwhile, plans to integrate its smartphone technology in vehicles built at its new car-bus factory as part of a push for “intelligent” urban transportation systems. ZTE decided to build vehicles on its own rather than try to break into the electronics niche tied to the traditional auto industry.

It would be almost impossible for a company such as ZTE to introduce products to the existing supply chains linked to traditional automakers, said Tian Feng, deputy general manager of the ZTE division Smart Auto.

“If ZTE doesn’t produce cars, we wouldn’t be able to promote many of our new technologies, including wireless charging and car networking,” Tian told Caixin.

Home-appliance maker Gree is also in the game, although it has struggled a bit to join the Chinese foray. In one setback, Gree shareholders recently rejected a management plan to buy bus manufacturer Zhuhai Yinlong.

But company CEO Dong Mingzhu remains convinced that expanding into vehicle manufacturing was the way to go. She sees a future for “smart home” products that integrate a consumer's car, home appliance and smartphone.

Dong thus put her own money on the line by personally investing 1 billion yuan in the bus company.

Dong’s personal commitment points to her enthusiasm as well as abundant funding that so far has been made available to electric and other new-energy vehicle startups and alliances. Investors have seen value in China's auto sector newcomers and support their effort to disrupt traditional industry leaders.

No wonder LeEco’s recent liquidity issues spooked the investment community as well as other electric car companies in China. Many feared negative repercussions for the entire industry.

“We do not want LeEco to die out,” said the founder of a competing electric car company who declined to be named. “That would have an extremely negative impact on capital flows.”

Luckily, LeEco recently received a 6 billion yuan cash injection. China’s electric-car dream is still alive.

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